Intellectual Property Aspects of Business Law Outline

LAW 797: INTELLECTUAL PROPERTY TRANSACTIONS KESAN SPRING 2013

· Beyond IP prosecution and litigation, we also have to care about the initial search, application process, fees, etc.

· Who might care about these additional aspects? Clients, financial backers, etc.

· Value Chain – product’s value derived from its complete chain – technology, manufacturing, etc.

· IP protections work both for powerful established firms and for incoming entrepreneurs. Monopoly powers can help incumbents make the most of the market, and conversely help newcomers compete against established firms through new technology.

· We can think of IP transactions as covering three points: business, technology, and litigation. These points are all connected through risk & opportunity.

· Standard-essential patents (“SEP”) for industry standards usually call for Fair Reasonable Non-Discriminatory (“FRND”) terms

o The use of SEPs and FRNDs is a current hot topic in patents

· There is currently no duty to record change in ownership w/ the patent office, making it very difficult to track down the proper owner of patents. The PTO is examining the possibility of requiring such a rule.

· Patent applications are published after 18 months. This is far less of a problem than it may seem. It sends a signal to the market, allows you to see competitors’ applications, and isn’t really that much of a competitive disadvantage since it’s 18 months in!

· Trademarks are the opposite of patents in that TMs must be used prior to application/issuance (exception of ITUs), whereas prior use would invalidate a patent application.

· Incontestability after 5 years is an important point in TM registration, as it limits the available invalidity arguments.

· Distinguish between trade names and trademarks. When referring to a company instead of its product, the trade name is not protected and doesn’t use respective markings (TM, SM, ®, etc.).

· Copyrights are the best line of protection for software against pure piracy.

· Copyright ownership is much harder to pin down because of long histories of repeated use, translations, etc. There needs to be due diligence!

· There are many different ways to determine IP value…

o Replacement method – how much it would take to replace the IP. This assumes the IP can be replicated, or something equivalent can be found.

o Market method – look at similar IP in the market to come up with a range/average

o Income method – how much income the IP brings in, or may potentially bring in. The problem is that this must be very forward-looking, trying to predict future revenue.

· Forfeiture is a problem mostly because it tends to be inadvertent. Even small firms, let alone large companies, have difficulty keeping track of what all employees are doing!

1/29/13

· Ronald Coase’s theory of the firm – bring together people with expertise in order to reduce transaction costs. Dealing with risks, returns, and controls, as one entity is more efficient.

· 4 ways to describe people starting a firm…

o What assets do they contribute?

o What are their expectations, and how do we control these expectations?

o What are their specific profit goals?

o What are their risk preferences?

· There are only 4 basic exit strategies for start-ups:

o Buy-out

o Go public, IPO

o Reorganization

o Liquidation

· Key question regarding exit strategies: if/when you sell, how do you make the company attractive to buyers?

· If nothing else, keep this in mind: “Happiness is positive cashflow.”

· In order to incentivize people to stay, promise equity, but don’t give it all upfront! Use vesting interests.

· There will be investors who just contribute monetarily and don’t want anything to do with management. They just care about payout and would probably want preferred stock, though it’s possible they would want debt financing instead of equity financing.

o These types of investors effectively eliminate certain types of organizational structures from consideration!

· Companies love equity financing, and hate debt financing!

· Sole proprietorship – completely owned and run by one person. This is the easiest form, but that is perhaps the only benefit. In fact, this is hardly an “organization” in the communal sense! There’s little opportunity to raise capital, and its existence is tied to the life of the single owner.

· General partnership – multiple people coming together, but no separate legal entity, and each person is jointly and separately liable.

· Limited partnership – usually has a general partner, but most partners’ liabilities will be limited to the amount of their investment. Because of the liability issues, neither forms of partnership are popular for tech startups.

· Corporation – creates a separate legal entity. Shareholders (treated as co-owners) are not liable for anything, and, importantly, are separate from management.

o Most corporations are C-corporations

o Corporations might not be the best option for startups. In small startups, shareholders & management would often be the same people. In addition, there’s a double taxation problem, where both the individuals and the corporation must pay respective taxes.

o However, big investors like to see rapid movement towards the corporation because it allows more control.

· Limited liability company (LLC) – doesn’t exist as a legal entity, so avoids the double taxation problem with corporations, but maintains limited liability for members and allows for different types of stock. However, w/o the corporate structure, the operating agreement between the members must be sophisticated. For instance, LLCs might dissolve upon one member leaving unless action is taken to prevent this.

o Most startups will choose to operate as LLCs

o Some states incentivize LLCs by making it easy to switch to a C-corp

2/4/13

· General stages of financing:

o Seed / early stage financing / angels

o Super angels / small VCs

o Multiple rounds of VCs

o IPO – generally a requirement to get the large amounts of funding, not a voluntary decision

· Debt financing (taking on loans) are usually the worst kind of financing because it requires an immediate start to repayment. However, the companies that take on loans are typically well-able to handle them. Furthermore, banks usually won’t even give out loans unless there is already a steady revenue stream. The “loan” might even just be a line of credit for a company to tie itself over until revenue comes in (ex. short-term need for payroll).

o Government might provide debt financing in the form of grants (usually relatively small amounts), tax subsidies, or low interest rates.

· Angel financing

o Pros

§ Experts in their respective fields

§ The “good guys,” very interested in success

§ Not as in a rush to make investment back

o Cons

§ Might not be an expert in your field

§ Tend to be very hands-on, which is an issue if they want to go a different direction

· Venture Capitalist (VC) financing

o VC financing can be seen as an “agency model” where the entrepreneur is like an agent to a VC principal.

§ Agents often take actions in self-interest that may not necessarily benefit (and sometimes even cost) the principal, and this becomes exacerbated when the principal has high information costs

§ VCs are entering into a risk, hoping the agent start-up will do the right thing

§ Pooling & separation pro